After soaring 35%
in just 6 weeks, silver has driven trader enthusiasm to a fever
pitch. Naturally after such a magnificent surge to new multi-decade
highs, silver bullishness is off the charts. Expectations for
continuing near-parabolic gains are nearly universal, with ebullient
commentators coming out of the woodwork to predict spectacular
near-term price targets.

This exuberance is
certainly understandable, traders crave big gains which silver can
provide in spades. I’ve been a big fan of silver for a long time.
Way back in November 2001 when silver traded just over $4, I started
recommending physical silver coins to our newsletter subscribers as
core long-term investments. Boy let me tell you, back then almost
no one was bullish on silver as this secular bull was being born!

Since then, we’ve
realized 108 silver-stock trades in our weekly and monthly
newsletters. Across all of them, which include all losers and the
brutal stock panic’s impact, our average annualized realized gains
ran +45.3%. After this decade of successful silver-stock trading, a
critical lesson dominates my mind. Like all bull markets, silver
doesn’t march up in a straight line forever. It flows and ebbs.
Though its bull indeed powers higher on balance, silver’s massive
uplegs are followed by brutal corrections.

Now if you are
crazy enough to subscribe to this theory that the silver zealots
think is heretical, that silver is not going to soar indefinitely,
then doesn’t it make sense to look for toppings? At some point
after a massive upleg, silver is going to need to correct. Period.
It doesn’t matter how bullish silver’s fundamentals may be, how
greedy silver enthusiasts get, or what is going on in the physical
silver market.

Silver corrected
hard in the past despite bullish fundamentals, wildly-bullish
enthusiasm, rumored supply shortages, tightness in certain coin
markets, foreign buying, and every other silver-to-the-moon argument
getting rehashed today. In fact, the more bullish, optimistic, and
enthusiastic investors and speculators get, the greater the odds for
an imminent sharp correction. These psychological conditions
seduce in everyone interested in buying anytime soon. Once they are
all in the rally burns out, and only sellers remain.

So how can we
recognize dangerous topping conditions in real-time? By studying
silver’s technical and sentimental conditions at its well-known past
major interim highs. If you know how past silver toppings played
out, then you can identify current episodes where the probabilities
heavily favor a correction. And this is priceless knowledge to
have, as silver’s corrections are wickedly fast, large, and
unforgiving.

If someone is
attempting to convince you silver is going to shoot higher without
interruption indefinitely, this chart ought to be very sobering.
Silver is no safe haven, no magical investment. It is one of the
most-volatile and risky commodities in existence. Yes it can rally
very fast, which is a lot of fun. But after its mightiest uplegs it
literally plummets and eviscerates the gullible who bought in
near the latest topping.

The horrific stock
panic of late 2008 was the epic discontinuity of a lifetime,
so it is best to consider silver in pre-panic and post-panic terms.
During the pre-panic years of this secular bull, silver enjoyed
three enormous uplegs that rocketed up to near-parabolic climaxes.
Then silver was ripped to shreds in the stock panic, traders rushed
to abandon this hyper-speculative metal. Then it recovered after
the panic with everything else, and its first true post-panic upleg
began last summer.

There are definite
technical (price-action) characteristics of past major toppings that
silver shares today. The most-obvious one is silver’s
near-parabolic vertical ascent. Note that the major pre-panic
uplegs accelerated the same way, rocketing skywards in a final manic
gasp before collapsing under their own psychological weight. These
near-parabolic terminal ascents can be measured and compared.

In every market
including silver, when prices surge too far too fast they
simply need to correct. This is a psychological phenomenon,
supply-demand fundamentals are completely irrelevant. Any price
rising too far too fast generates tremendous greed. This unbalanced
sentiment sucks in all traders interested in buying in anytime
soon. Once all these buyers have bought, only sellers remain. And
then some minor catalyst ignites initial selling pressure which
quickly snowballs, resulting in a full-blown correction.

But how can we
measure this amorphous concept of “too far too fast”? Many years
ago I developed a simple trading system that quantifies it. Some
kind of objective baseline was needed from which to measure the
rapidity of advances, and the perfect one happened to be any price’s
200-day moving average. 200dmas are not static, they gradually rise
to reflect an ongoing bull market. Yet they still move slowly
enough to filter out all the day-to-day volatility, which can get
pretty extreme in silver’s case.

My
Relativity
trading system considers prices as multiples of their
200dmas. Over time, any price in a bull-market trend tends to carve
a horizontal trading range relative to its 200dma. This is
readily evident in silver above. If you take the blue silver price
and divide it by its black 200dma line, the light red Relative
Silver (rSilver) line is the result. Since 2003, silver has tended
to trade between 0.95x its 200dma on the low side to 1.40x its
200dma on the high side. This relative trading range defines “too
far too fast”.

The best time to
buy silver is when it is low, near its 200dma. Thanks to this very
tool, back in mid-August when silver was near $18 I wrote an essay
claiming a big
autumn silver rally was coming. I encourage you to
read it, as most analysts were very bearish on silver last
summer as it made its usual
seasonal lows.
But our subscribers were ready in advance for this latest mighty
silver upleg.

The best time to
sell silver is when it is high, stretched far above its 200dma.
Historically in this secular bull, once silver ran 40%+ above its
200dma it was pushing unsustainable advances. How do I know? Check
out the chart. Silver soon collapsed each time after
exceeding this metric, it had simply rallied too far too fast. And
where is rSilver today? This week it hit a breathtaking 1.513x,
which is crazy-high. Enthusiastic traders have bid silver over 50%
above its 200dma! These levels are unsustainably extreme.

So in technical
terms, silver’s recent price action looks very much like past major
toppings. Silver has shot vertical in a near-parabolic spike. And
it has rallied so far so fast that it has far exceeded its
bull-to-date danger zone of 1.40x its 200dma. What happened in the
past after these very conditions? The chart doesn’t lie, silver
plummeted like a rock. And if you are a newer silver player,
you can’t imagine how brutal these post-topping corrections were.
They literally ruined countless traders not prepared for them.

This table
summarizes some of the price action surrounding these major past
toppings. The topping numbers below correspond with the ones in the
chart above. While silver’s post-panic recovery in 2009 was very
different from a true silver upleg, I threw in its topping for good
measure. This table looks intimidating at first, but it is simple
and easy to understand. Heeding its hard lessons could save you
from massive losses in your silver-related trading positions.

The most-important
toppings to consider are the first three of this bull, April 2004,
May 2006, and March 2008. They were normal silver bull-market
advances to new bull highs. The fourth one was a recovery from an
abnormal and overdone stock-panic selloff, so its technicals are
atypical. In addition, that fourth upleg didn’t carry silver to new
bull highs like all the other ones. Let’s walk through those early
uplegs.

Over an upleg
duration averaging 7 months, silver shot 92% higher on average in
its massive pre-panic uplegs. So a doubling in silver over
such a short period of time is actually par for the course. Many
traders are surprised to learn that silver’s entire
bull-market gains are won in a handful of relatively-short periods
of time. For the vast majority of its bull, silver wasn’t very
exciting at all. This curious metal drifts listlessly for a long
time, then awakens to surge.

The average daily
gains over the entire spans of these uplegs was 0.62%. In the final
6 weeks before these toppings, silver surged almost 30% on average.
In the terminal 4 weeks, it rallied nearly 20%. In the final 2
weeks, it blasted over 14% higher. And in its final week before its
upleg-ending topping, silver averaged big gains exceeding 7%. The
average daily volatility ran 2.1% over this final week. Relative
Silver peaked above 1.40x, and exceeded this danger zone for a
varying number of days.

These numbers are
hard data, not opinion or theory. So it is fascinating to compare
what silver has done in its current upleg with what it averaged in
its massive pre-panic ones. As of this week, silver has rocketed
over 106% higher in just over 7 months! This is a
considerably-greater gain than its past uplegs’ average of 92%, over
about the same period of time. Distilled into a daily average, this
silver upleg’s 0.69% gains were among the biggest ever seen in this
bull.

Over the 6 weeks
before silver’s latest high this week, it shot up nearly 35%! This
is a near-parabolic ascent that almost equals the biggest one yet
seen ahead of the May 2006 top. Provocatively, back then silver
sentiment and exuberance were as bullish as we’re seeing today.
Over the past 4 weeks before its latest high, silver shot up over
19% which is close to the 20% average. So at least over terminal
6-week and 4-week spans, silver’s latest ascent certainly matches
past unsustainability thresholds.

Because silver has
failed to rally much over the past week or so, its final 2-week and
1-week gains aren’t as extreme as past averages. We are talking
almost 8% versus over 14% on the 2-week metric, and just over 4%
compared to over 7% on the final-week one. This lackluster action
has also dragged down our current upleg’s latest volatility read,
but silver has been really volatile in recent weeks as traders well
know.

And in rSilver
terms, today’s upleg is the most extreme since the massive one
topping in May 2006. Silver trading at 1.513x its 200dma earlier
this week was the highest seen since that month! Silver has also
enjoyed more days above 1.4x recently than at every other major top
since that one as well. So when we look at measures of the
magnitude and late speed of silver’s current upleg, they track very
well with what we’ve seen at past major toppings. And that May 2006
topping is the closest match by far.

What happened
after that one? Silver plummeted so fast that many traders called
it a crash. It was brutal beyond belief. If you weren’t
trading silver or silver stocks back then, it is hard to even
communicate how ugly it was and how many traders were wiped out.
Silver plunged over 35% in just over a month, a mind-blowing
selloff. And lest you think that’s extreme, it really isn’t for
silver. Its average post-top correction ran about 30% over a span
of less than a month and a half. Yes,
under 6 weeks!

A 30% to 35% loss
sounds academic to some, so consider it in absolute terms. If
silver indeed topped earlier this week, falling by a third
would hammer it back down to $24 within a couple months on the very
outside! Though this degree of correction would be totally normal
and expected, and wouldn’t even come close to jeopardizing silver’s
secular bull, the damage $24 would do to silver psychology and
silver-stock levels would be catastrophic. Silver stocks usually
leverage silver selloffs, amplifying its losses!

On average these
pre-panic corrections saw daily losses approaching 1.2%. By
the first week after their tops they had fallen over 11%, nearly 18%
by the second, over 22% by the fourth, and almost 24% by the sixth.
When silver falls 10% a week for a couple weeks, it scares
silver speculators to death. They rush to abandon their recent love
with blinding speed. And selling begets ever-more selling, as
prices spiral lower more and more traders capitulate.

And today we are
in a unique situation that makes this potential silver topping even
riskier than most. Believe it or not, a major driver of silver’s
fortunes is the state of the general stock markets! As such a
hyper-risky commodity, silver is heavily buffeted by the sentiment
winds emanating from the stock markets. When general stocks enter a
correction, silver tends to fall with stocks unless gold is
exceptionally strong. And even then silver drifts sideways, torn
between following gold (its normal driver) and stocks. As I’ve
warned in recent weeks, the US stock markets are due for
a major correction
today.

The sentiment
splash damage from this alone will hammer silver lower, but now
stock-market traders have direct access to silver via the popular
SLV silver ETF.
This vehicle is a direct conduit between the vast pools of
stock-market capital and physical silver bullion. As stock traders
get scared by the stock selloff, they will likely sell all their
risky trades including SLV. If they dump SLV at a faster
rate than silver is being sold in the futures markets, this ETF’s
custodians will be forced to sell silver bullion (intensifying the
silver selloff).

Differential
selling pressure forces physical ETFs to sell their underlying
assets to raise enough cash to buy back the excessive shares offered
for sale. If they don’t do this, the ETF will decouple from its
underlying to the downside and fail in its tracking mission. SLV
didn’t even exist at the April 2004 topping, was just 2 weeks old at
the May 2006 one, and wasn’t super-popular yet by the March 2008
one. So today’s topping may very well be the first one where
stock-market selling directly hammers silver prices.

While silver’s
secular bull still has awesome potential in the coming years, today
silver is very overbought and looks to be topping. It needs to
correct to rebalance sentiment, to eradicate the excessive greed and
irrational exuberance today. And silver corrections tend to be
unbelievably brutal, they are hard and fast and take no prisoners.
When most silver enthusiasts hear this message, they get depressed.

But corrections
are actually very exciting and bullish! Our goal as investors and
speculators is to buy low and sell high, right? The best
times to buy low, whether we are talking physical silver coins or
great silver stocks, is just as one of these massive corrections
matures. Would you rather add new silver investments at $36 or
$24? Would you rather buy silver stocks at recent highs or 35% to
50% lower? Corrections are the best buying opportunities ever seen
within ongoing secular bulls, they are a great blessing.

At Zeal we are
locked and loaded and ready as always. After realizing our large
gains on several-dozen commodities-stock positions in this upleg, we
are mostly in cash. The resulting bargains after the general stock
markets, commodities (including silver), and commodities stocks
correct should be awesome. When the time to buy arrives, I will
explain why and exactly what we are buying in our acclaimed
weekly and
monthly
newsletters. Our trading
track record
since 2001 is stellar, 583 stock trades with average annualized
realized gains of +52%!
Subscribe today
and start thriving in these markets.

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The bottom line is
silver looks to be topping based on bull-to-date precedent. The
odds are very high that silver is in store for another one of its
brutal and unforgiving corrections. These are dangerous events not
to be trifled with, as silver tends to plummet by nearly a third in
less than 6 weeks! Silver stocks usually amplify these losses.
Traders caught unaware by a major silver correction are ripped to
shreds.

Nevertheless,
these are very healthy and necessary events. They rebalance away
hyper-bullish and greedy sentiment, resetting the stage so silver’s
secular bull can continue powering higher. And corrections yield
the best buying opportunities ever seen within ongoing bulls. So
investors and speculators looking to add silver-related positions
have a rare and valuable opportunity to buy low.